Archive for October, 2012

Earnings Don’t Matter!

Here we are in the midst of a very important earnings season and I am the first to say that I can’t believe I am saying that earnings do not matter! From the day that the market started trading, earnings were always the major factor in stock evaluation. Earnings per Share (EPS) and Price Earnings Ratio (PE) have been two of the most popular and most used gauges of a company’s stock price and both stress the importance of earnings. That is how it always was but not anymore. Wall Street has been able to convince investors that a company does not actually have to improve or increase their earnings but just to do better than predetermined estimates.  That better than the estimates is determined by a preselected judge (Wall Street itself) with a separate agenda. You don’t have to be Einstein to know that it is in Wall Street’s best interest to make stocks look as attractive to investors as possible in order for them to move out their inventory at a profit. So, Wall Street uses these estimates to control your opinion on stock valuations by always making them look attractive. This has been going on for a while now and should come as no surprise to anyone. But things have changed even from there. Now, forward guidance seems to have become more important than earnings. What the company says about what they think will happen next quarter trumps the performance of the company for the last quarter. When you combine forward guidance and Wall Street estimates, you have gone pretty far toward making earnings pretty insignificant. Again, this is not necessarily a new thing. There have been recent articles that show that the market has diverged from the economy and earnings and how that fact has led to historically poor performances from the hedge funds this year. But the fact is that there is an even bigger reason why the divergence has occurred……government intervention. No matter how bad the earnings are and no matter how bad the forward guidance is, the market will not go down because the Fed will not let it. They will continue to pump money into the economy through whatever means possible. This lone factor has confused and stymied the “smart money” hedge fund managers all year. Their natural instincts force them to take notice of company earnings and macroscopically, the overall economy. Over the past several months, the economy has seen negative news and earnings estimates have been slashed repeatedly and the fund managers know that means trouble for the market. Unlike me, however, they just don’t know that today, it just doesn’t matter!

 

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Could the Fed be Smarter than I Think?

The United States faces a Federal debt of epic proportions that will get even bigger over the next few years. Way back when the European debt crisis started, I made mention to the fact that we were going to have to go through what Europe is going through and probably worse. Many people offered what I thought were overly optimistic cutback ideas that they said would significantly decrease our debt.
Personally, I went on record saying that none of it would work and that the situation was very, very serious. But, the crisis in Europe and our own problems with our economy plus the slowdown in China have diverted people’s attention from the seriousness of our own debt crisis. Because there were more pressing problems, our debt situation has continued and worsened.
Sticking to my guns, I still feel that the only way that we can get out of our debt is to devalue the US Dollar substantially. This, of course, will not endear us to the rest of the world especially those holding our debt. Further, it will not be endearing to the people of the US as inflation will spike to unprecedented highs and those who travel abroad will be especially unhappy as the US dollar will not be worth anything near what it has been.
We might possibly get away with a devalued dollar’s effect on the citizens of the US but not on foreign countries. By devaluing the US Dollar, you would be decreasing the real value of the debt held in our currency by a foreign country. With the amount that we would need to devalue the dollar, we would probably be chopping the value of the debt held in dollars in half at least! If the US did this, it would seriously tick off a lot of trading partners both allies and competitors. This could create very big problems for the US.
But, what if the US devalued the US Dollar unintentionally? Remember, in order to devalue a currency, you must flood (print dollars) the market with that currency which decreases the value of the currency against other currencies…….just in the same way you would flood the market with currency in order to stimulate growth. QE3 was seen by some experts as not needed and by other experts as useless. This begs the question as to why the Fed would do it. Even two of the voting Fed board members questioned the potential success of QE3 feeling that it would not work!
Even with the doubters and doomsayers, the Fed did it anyway. Seems pretty stupid to me, unless the Fed is using the threat of the US slipping back into a recession and the overall global economic slowdown as an excuse to flood the markets with US dollars even though they know that it will not make a difference to the current economic situation….it just will not matter. At least, it will not make a difference in terms of stimulating the economy. But what if their goal has nothing to do with stimulating the economy? What if their goal was to use this environment as a good reason, a warranted excuse, to flood the market with dollars with the sole purpose of eventually devaluing the US dollar to pay off the debt?
Now, when the economies of the world start to recover and their growth rates begin to heat up, and countries have to start raising rates to quell an increasing inflation, all the Fed has to do is nothing! If the Fed holds rates down and accepts some increasing inflation, then global currencies will rise against the dollar thereby weakening or devaluing the dollar. At that moment in time, all the Fed has to do is to say that they do not feel comfortable with the growth in the US and they need to keep rates low until they are certain that the recovery has strong legs. Then, it would appear that the devaluing of the US dollar was not done purposely to cheapen our debt but as collateral damage associated with lowering rates to combat recession.
Could the Fed actually be thinking this way? Could they be this smart? I for one would really like to believe so!